BANCO DE MÉXICO

A BRIEF SUMMARY

OF BANKING

IN MEXICO

Eduardo Turrent

Banco de México

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Banking is the process where one or several companies specialize in

taking deposits from the general public in order to lend funds. Until 1864,

Mexico had no banks, although credit transactions did take place. During the

colonial period, credit was granted on a preferential basis by religious orders or

trading guilds. The history of banking in Mexico officially began in 1864 with the

opening in Mexico City of a British bank: The Bank of London, Mexico and South

America. As a result of concessions issued by the local governing authorities, in

1875, Banco de Santa Eulalia opened its doors in the state of Chihuahua

followed not long after by Banco de Hidalgo. It was not until 1881 during the

presidency of Manuel González that Banco Nacional Mexicano was founded in

Mexico City with capital from the Franco Egyptian Bank headquartered in Paris.

In 1883, Eduardo L’Enfer obtained a concession for Banco Mercantil, Agrícola e

Hipotecario, and in that same year, Banco Minero, Banco de Chihuahua and

Banco Mexicano de Chihuahua were re-established in Chihuahua. Subsequently,

as of 1888, other banks were established in that state as well as two issuing

banks in the state of Yucatán and several more in Mexico City.

All of these banks had been set up under different contracts. The

irregularity of bank concessions was reflected not in their number or frequency,

but in the diversity of the terms and conditions used. After a failed attempt in

1890, in 1896, the then Finance Minister of Porfirio Díaz, José Ives Limantour,

began drafting a new banking act aimed at standardizing the terms under which

existing and future banks would operate. From the standpoint of bank

specialization, the Law on Credit Institutions that was passed in 1897

considered three banking models: issuing banks (deposit and discount banks

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with the power to issue banknotes), mortgage loan banks, and commercial

banks. Summing up, just before the outbreak of the 1910 Revolution, Mexico

had the following banking structure: 24 issuing banks, including Banco

Nacional de México and Bank of London, which were the only banks whose

notes could circulate in Mexico. The notes of other issuing banks were only

allowed to circulate in the state where they had been incorporated. Finally, this

latter group included two mortgage banks and five banks for the capitalization

of the industrial and agricultural sectors.

1. The revolutionary period

The Maderista revolution was basically a political revolution. From a

banking point of view, the presidency of Francisco I. Madero was merely a

continuation of the Porfirian legacy. Thus, during his administration a preference

prevailed for the plurality of issuing banks. Madero’s government, through the

Finance Ministry, even tried to increase the number of issuing banks in order to

extend the country’s bank network. This scenario radically changed after the

usurper Victoriano Huerta defeated Madero, triggering the so-called

Constitucionalista revolutionary movement.

Huerta’s military campaign against the revolutionaries soon took its toll on

his finances, and so besides trying to obtain loans abroad, the regime also

forced local banks to extend loans. Two loans were imposed on all banks: a first

in 1913 for a total of 18.2 million, and a second in 1914 for slightly over 41

million pesos. Summing up, between February 1913 and April 1915, local banks

granted loans amounting to almost 64 million pesos to Huerta, just over 59

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million of which corresponded to the two abovementioned general loans while

the rest was granted by specific banks.

That initial stage of the Revolution, which came to a head at the

beginning of 1915, severely impacted banks. Bankruptcies were the result of

three factors: the looting of banks during the struggle, damages to bank

borrowers, and the abovementioned compulsory loans. Consequently, by the

middle of 1914, banknotes outstanding plus demand deposits had a metal

guarantee of only 26.5 percent, as compared with a legal requirement of

33 percent. Similarly, the problem portfolio had increased by more than 54

percent over the course of two years.

In August 1915, the government led by Venustiano Carranza tried to

force issuing banks to adhere to the 1897 Banking Act or else be dissolved.

Later on, in September 1916, this stance changed radically. The

government declared the existence of such institutions illegal, and decreed that

all notes outstanding should be fully guaranteed by metal and proceeded to

dissolve them. Finally, in October 1917, the inevitable occurred after Venustiano

Carranza’s government resorted to bank seizure and forcible lending, which

depleted banks’ metal reserves. This period of seizure continued during the final

days of Carranza’s government in 1920 without banks being dissolved. Towards

the end of his administration, Venustiano Carranza appeared to soften his

stance and in 1919 announced that some seized banks could resume business in

the future. However, this never happened, as a group of men from the state of

Sonora, who included Álvaro Obregón and Plutarco Elías Calles among their

ranks, would come to power in Mexico.

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2. The reconstruction period

Article 28 of the 1917 Constitution stated that in Mexico a Single Issuing

Bank controlled by the government would have the exclusive power to issue

banknotes. As this laid the legal foundations for Banco de México —which would

be created in 1925— it implicitly ruled out the possibility of private banks

continuing to issue them. Consequently, any deposit and discount banks that

had survived the Revolution would no longer be able to issue banknotes.

As for their future, in 1921 the government of President Álvaro Obregón

decreed that former issuing banks would be returned to their owners and would

shortly be able to resume business. Thus, of the 22 banks that had been seized

during the Venustiano Carranza regime, 16 resumed business during the

Obregón period, and only six were forced to close due to insolvency.

It was during the presidency of Plutarco Elias Calles (1924-1926) that the

country’s banking system got back on its feet and underwent further progress.

Following sizeable budget cuts to provide capital for Banco de México, the

central bank opened its doors in 1925. Having now an entity lying at the heart

of the banking system, in 1926 a new bank law based on the specialization

model was enacted, and classification of Mexico’s banks was further perfected.

Under this law, deposit and discount banks, mortgage banks, banks for the

capitalization of the industrial and agricultural sectors and for fixed

investment purposes, trust and savings banks, general depository

institutions, and surety companies would be credit institutions. A new bank

law enacted in 1932 further perfected this classification with the introduction of

a very important concept: the national banking institution (the legal origin of

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development banks).

The following national banks existed under this law in Mexico towards the

end of the 1930s: Banobras, Nacional Financiera, Unión Nacional de Productores

de Azúcar, Banco Nacional de Comercio Exterior, Banco Ejidal, Banco

Agrícola, and other smaller ones. As for private banks, many have been created

since the middle of the 1920s, although mainly deposit and discount banks.

According to reliable sources, between 1932 and 1940 the total number

of private banks in Mexico rose from 51 to 87. A 1940 snapshot of the sector

reveals that of the total number of private banks that existed that year, 70

percent were deposit and discount banks. Banco Nacional de México, the Bank

of London and Mexico, and Banco de Comercio, which had been created in

1932, stood out for the progress they had made within a relatively short period

of time. Of the other 30 percent, eight were banks for the capitalization of

savings (now savings and loans banks) –a concept that was eliminated from

bank legislation several decades ago— eight specialized in trusts, another eight

in savings, and only two in the capitalization of the industrial and agricultural

sectors.

At the end of 1940 only two banks specialized in mortgage loans.

3. The conceived model

During the 1940s, the framers of Mexico’s financial system had a fairly

clear idea of the model they wanted. Their dream was to create a system with

the following four features. First, they wanted a national financial system with

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hardly any or no participation from foreign banks. Likewise, they wanted a

system of specialized financial institutions that had consistency between deposit

and credit terms, and between loan liabilities and destination. But above all, they

wanted a competitive banking system with strong market competition. They

sought for a robust private financial system that would also be complemented

by a broad development bank sector.

Mexico’s aspiration to have a fundamentally national bank had been

achieved in 1932 following the passing of the Banking Act that same year.

Whether at that time in history Mexico needed a new law to regulate banks or not

is debatable. What is clear is that the doctrine of nationalism that had been born

out of the revolutionary movement imbued the banking reforms of 1932. After the

Revolution and throughout the 1920s, several foreign bank branches had begun

operating in Mexico. In 1932, Congress decided to reduce their operating scope

to the normal transactions permitted to deposit and discount banks. All foreign

branches, except for one, found this restriction excessive and, as a result, the

following foreign banks left Mexico: Deutsche Bank of Latin America, Canadian

Commerce Bank, Bank of Montreal, Equitable Trust Co., Anglo South American

Bank, and National Bank, among others.

The 1941 Banking Act was perfected and deepened the classification of

financial intermediaries. The guiding principle of this specialization was the same

as that which had inspired previous bank laws beginning with the 1987 Act

during the Porfirian period. Under the 1941 law, credit institutions would

comprise deposit banks, financial and mortgage companies, and banks for the

capitalization of savings. Specialized companies could be set up for savings

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and fiduciary operations or they could be run from special departments at

any of the institutions mentioned in the previous paragraph. Auxiliary credit

organizations included the following entities: general deposit warehouses,

clearing houses, stock markets, and credit unions. Entities of that nature set up

by the Federal Government would be considered national auxiliary credit

organizations and institutions.

It was very evident to the drafter of the 1941 Banking Act that the

Mexican financial system had too many banks and too few long-term lending

institutions. This reflected a trend in favor of commercial loans to the detriment

of loans aimed at promoting the capitalization of production units. In a bid to

offset this imbalance, the 1941 Banking Act granted very broad operating

powers to financial companies. As for deposits, these institutions were created

to issue general and commercial bonds, but could also receive funds over

shorter terms.

A very broad operating framework for financial companies resulted in

many entities multiplying and achieving a fast rate of growth over the following

years. In particular, the framework encouraged the shareholders of many

deposit banks to set up financial companies, and deposit banks and financial

companies with the same owners even loaned money to each other. Thus, the

36 financial companies that existed in 1941 had grown to 84 by 1945, or a

growth rate of 130 percent over the space of only four years. As financial

companies were able to draw funds almost on demand and their affiliates

transferred them, in 1958 the authorities decided to include financial companies

in the obligatory deposit or legal reserve regime.

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Although financial companies grew the most during the Second World

War, other auxiliary credit institutions and organizations also grew rapidly. Thus,

from 1941 to 1945 the number of deposit banks rose from 67 to 97 and the

total number of credit institutions from 101 to 311. Of that total, the number of

fiduciary companies increased from 26 to 65, mortgage companies from 12 to

20, and departments and entities engaged in capturing savings from 10 to 34.

As for the system of deposit banks, during the same period the number of

branches and agencies four-folded, from 110 to 448. Within such a scenario of

accelerated growth, assets of deposit banks, including their savings

departments, expanded by 300%.

4. The creation of financial groups

In the 1950s, the trend in Mexico’s financial system towards the universal

bank prototype became more marked. Universal banking is generally understood

to mean the provision of full financial services by a single entity or consortium.

In practice, the universal banking concept may take the shape of a single

institution that offers all those services, or consortiums, groups or financial

groups. The latter was the organizational variant under which Mexico’s

universal banking regime was formed. Ideally, the heads of such financial

groups should have been holding companies. However, this was not the case.

It was deposit banks that gradually formed their financial groups, beginning

with a financial company.

This process apparently went unobserved by the country’s legislators and

financial sector regulators. The 1941 Act, which had been inspired by the

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principle of specialization, remained in force while the financial system

progressed towards a universal banking model through the gradual formation of

financial groups. One of the first consortiums to progress towards this form of

organization was Seguros La Latinoamericana, followed by Banco del País,

Fianzas Lotonal, and Seguros La Continental, among others.

The general financial group model that took shape in Mexico preferably

had a deposit bank at its head. A deposit bank was usually able to group

together a financial company, a mortgage company, a savings department, and

a trust department as its initial affiliates. The process would then continue

exhaustively through the acquisition of an insurance company and a surety

company, a general deposit warehouse, and a brokerage firm. This

organizational model was subsequently completed with the inclusion of a

financial leasing entity, and probably a factoring affiliate as well. Finally, the

model did not preclude the option of acquiring other kinds of entities as

affiliates, such as industrial sector and services companies.

Two trends in Mexico encouraged the creation of financial groups. The

first was the grouping of institutions with different specializations or business

lines in order to exploit complementary financial services and operating and

marketing advantages and offer them in an integrated way. Another trend was

towards the merger or integration of institutions belonging to the same sector,

mainly deposit banks. This phenomenon, which took off in the United

States and Europe during the 1960s, was mainly the result of incentives given

to exploit economies of scale.

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Most Mexican financial groups had already been incorporated and were

open for business when, at a very late stage, the decision was made to legally

recognize them. To that end, in December 1970 a provision to recognize the

existence of these groups was passed “obliging them to pursue a coordinated

financial policy and to establish a system of reciprocal guarantees in the event of

capital loss.” Under the new rules, a financial group was a conglomerate whose

affiliates followed a coordinated financial policy with significant links in terms of

assets.

Although this definition was not precise and gave rise to a lot of criticism

at the time due to its vagueness, official recognition for already existing financial

groups made rapid progress during the first half of the 1970s. Thus, in

December 1974, the authorities announced that the existence of 15 financial

groups had been recognized as of that date.

The authorities also announced that some medium-sized groups had

merged with small groups operating in other states, fostering a more balanced

development of banks. Of the 15 financial groups that were officially recognized

towards the end of 1974, those grouped around the following stood out: Banco

Nacional de México, Bank of London, Banco Comercial Mexicano, Banco del

País, Banco de Industria y Comercio, and Banco Internacional.

5. Progress with commercial banking

Besides official recognition for financial groups, the other major banking

reform adopted in Mexico during the 1970s was the creation of the so-called

commercial banking. Mexico’s adoption of the commercial banking system was

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a very gradual process that took place in three stages. The first stage was a

limited legal reform consisting of a simple announcement in the December

1974 law of the concept’s implementation in Mexico. This was followed by a

series of reforms to the Banking Act in December 1978. Finally, commercial

banks were constituted under that legal framework.

Financial groups were an important historical precedent to commercial

banks. Most of these groups had been created with institutional elements that

fitted the multiple (commercial) banking concepts: a deposit bank, a financial

company, and a mortgage company. Likewise, and for some time, deposit banks

themselves had savings and fiduciary operation departments. As these variants

complemented deposit, financial and mortgage operations, the commercial

banking law prohibited specialized institutions from undertaking these operations

independently. The scenario was now ripe for structural development. Thus, a

commercial bank was defined as a company authorized to undertake the

following operations: deposits, savings, financial and mortgage intermediation,

and trust transactions.

According to Miguel Mancera, based on obtainable economies of scale,

commercial banking would be clearly superior to specialized banking as a formula

for promoting financial sector efficiency. In line with this view, commercial banks

would allow for a better use of installed capacity while at the same time eliminate

redundant administrative services. Commercial banks would also enable Mexican

banks to achieve a deeper penetration of foreign financial markets as a result of

their greater qualitative weight in them.

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Practical rules issued for incorporating multiple banks initially saw them as

emerging from the merger of already existing deposit banks, financial

companies, and mortgage companies. Any of the three could be the company

seeking the merger (or merging company) and the rest would be the merged

companies. Subsequently, in 1978, this criteria was made more flexible when it

became possible to grant authorization for new commercial banks.

As mentioned, the merger process and the creation of new commercial

banks began in December 1976 and concluded in April 1980. The first five

commercial banks to be created were: Multibanco Mercantil de México,

Banpacífico, Banca Promex, Banco de Crédito y Servicios, and Unibanco, in the

latter case being Financiera de Fomento Industrial the merging company. The

first large commercial bank was Comermex (January 1977), followed by

Banamex (March 1977), Internacional (July 1977), Atlántico (July 1977),

Serfín (October 1977), and Bancomer (November 1977). Of the 34 commercial

banks that were created during that transition period, the last five were: Banco

Obrero (September 1979), Banco Mexicano-Somex (January 1980), Banco

Monterrey (January 1980), Banco del Centro (January 1980), and Banco

Aboumrad (April 1980).

Commercial banks did not imply the disappearance of financial groups.

They continued to exist and would only be dismantled after banks had been

expropriated as part of a reorganization of the financial system in response to

the reform.

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6. Bank expropriation

In accordance with the corresponding expropriation decree, the then

President José López Portillo nationalized banks on the basis of them having

“obtained excessive gains from providing a granted public service; having

created monopolies with money from the public; in order to stop credit

from being available only to the upper classes and to make cheap and

opportune credit available to most people; to ease the country’s exit from

the economic crisis that had been aggravated by the State’s lack of direct

control over the financial system; and, to keep the peace and be able to adopt

measures aimed at correcting internal distress.”

As these “required measures” clearly included the broad implementation

of exchange rate control, the reasons given to justify the adoption of exchange

rate control should also be mentioned. Economic austerity measures that had

been applied to contain the crisis had not rendered results, mainly because of

the amount of capital flight. The economic crisis that had prevailed until at least

the middle of 1981 had been caused by two factors: less demand in foreign

markets for Mexico’s exports and more expensive and scarcer foreign credit.

As for banks, the corresponding decree stated that the following was

being expropriated “in favor of the Nation”: the installations, buildings, furniture,

equipment, assets, safety boxes, vaults, branches, agencies, offices,

investments, stock or stakes of other companies, securities, rights, and all other

furniture and property belonging to the expropriated banks. There were also

some exceptions to the rule. National credit institutions and mixed banks were

excluded because they were already in government hands, as was Banco

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Obrero, which belonged to the labor sector, and Citibank and offices

representing foreign banks, as they were not owned by Mexicans. That is why

the act did not refer to “nationalization”, and foreign individuals and

corporations were not expropriated either.

Once the expropriation of banks had been implemented, the following

bank policy measures took effect until the end of November 1982 or the

beginning of December 1982. The measures that were announced on

September 4, 1982 were of two types: some dealt with the structure of interest

rates and others to the exchange rate policy applicable to bank operations.

Regarding interest rates it was stipulated that: 1) rates on new deposits would

decrease by two percentage points per week over five weeks; 2) the annual

rate on savings deposits would increase from 4 to 20 percentage; 3) lending

rates applicable to performing loans for productive companies would decrease

straight away by five percentage points; and, 4) rates applicable to entry-level

loans decreased by up to 23 percentage points to 11 percent. As for foreign

currency-denominated bank loans and deposits, the following was agreed: a)

loans would have a “preferential” exchange rate of 50 pesos per dollar; and, b)

deposits would have an “ordinary” rate of 70 pesos per dollar. At the time these

exchange rate measures were adopted, the free market exchange rate was 100

pesos per dollar or higher.

What the cost of the application of these measures was to banks is hard to

estimate. According to Carlos Tello, governor of Banco de México from

September to December 1982, the measures lowered banks’ income which was

offset by increasing the legal reserve rate. Thus, while the so-called “conversion

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of mexdollars to pesos” along with the modification of bank borrowing and

lending rates amounted to around 32 thousand million pesos, the effect of

raising the legal reserve requirement rate amounted to slightly over 19.3

thousand million pesos. According to the then governor of Banco de México, the

net result of this balance amounted to slightly more than 12.5 thousand million

pesos, and the central bank accounted for it as liabilities.

7. Reorganizing nationalized banks

According to President Miguel de la Madrid (1982-1988), the

expropriation of banks provided an opportunity to rationalize the structure of the

financial system. This project involved three stages: first, the expropriation

process would have to be completed by compensating the shareholders of

expropriated banks. The second stage implied redefining the institutional

concept of a bank and defining new borders between banking and the rest

of the financial sector. A third stage led to the restructuring of the banking

system in search of greater efficiency and competition while keeping banks

profitable.

The López Portillo government expropriated banks but it was his successor,

Miguel de la Madrid, who was responsible for compensating expropriated

bankers and organizing and executing an unusual situation in Mexico: putting

banks in the hands of the public sector. The most controversial aspect of the

compensation was valuing the expropriated banks. How much was a bank

worth? To resolve this problem several criteria were taken into account, but in

the end the economic value was used (evaluating each bank’s capacity to

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generate future earnings).

Compensation of former bank shareholders was completed in the fall of

1985. The two largest banks (Banamex and Bancomer) absorbed around 63%

of the total compensation amount, and including the third bank, around 75

percent. All in all, based on eight tranches of compensation published between

August 22, 1983 and August 23, 1985, the shareholders of 49 expropriated

banks were compensated.

It is widely known that the then president elect, Miguel de la Madrid, did

not agree with the expropriation of the country’s private banks. It is also known

that de la Madrid was not even consulted when the measure was decided on.

Once in government, although Madrid did not agree to reverse the expropriation

he did agree to mixed –30 percent of the shares owned by public investors—

and competitive banking. It was largely for that reason that the regime decided

to appoint prestigious professionals with the required training in financing to

head the expropriated banks.

The other issue was related to imposing limits between banks and other

financial activities. Two important measures arose from this challenge. The first

was the decision to privatize financial and non-financial affiliates of expropriated

banks. The second had to do with promoting a parallel financial system able to

compete with banks that were now in government hands.

The legal reason for privatizing bank affiliates was that the decree had

aimed at expropriating commercial banks only. Other reasons used to

privatize bank affiliates were: to restore a balance to financial activities

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other than banking between the private and public sector and be congruent

with the principle of a mixed economy, and foster private investment in the

sector. The application of this policy basically derived from the privatization of

banks’ brokerage firms.

Particularly during the first few years of the de la Madrid regime there

was a lot of interest in rebuilding the confidence that the expropriation of banks

had undermined. This meant supporting the development of so-called parallel

banks, especially brokerage firms. The strategy resulted in such firms

monopolizing the management of public debt securities and limited banks’ ability

to participate in so-called non-traditional banking. At the same time, further

progress was sought with banks’ structural change. Thus, of the 60 banks that

existed in 1982, by 1985, due to a careful merger process, there were 19: six

nationwide banks, seven multiregional banks, and six regional banks. All of

these changes took place amid an environment in which banks first managed to

survive, strengthened their operations, and then expanded.

Despite the economic crisis which lasted from 1983 through the end of

the de la Madrid administration, bank numbers for the period were not

unfavorable. During the period from 1982 to 1988, bank deposits grew at an

annual average rate of 4.3% in real terms. Financial savings, which in 1982

accounted for 32 percent of GDP, had reached 40 percent by 1988. Although

small in international terms, the increase was almost 25 percent. Meanwhile, the

loan portfolio as a percentage of GDP rose from 17 percent in 1982 to 25

percent in 1987.

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8. Sale of banks

The process of downsizing the government sector began during Miguel

de la Madrid’s term in office. However, the largest and most controversial

privatizations took place during the administration of Carlos Salinas de Gortari

(1988-1994). It was during that period, between 1989 and 1990, that

commercial banks were privatized.

The privatization of commercial banks which was completed during the

Salinas administration first required several legal reforms. Article 28 of the

Constitution had to be amended to allow for the participation of private

investors in bank services and lending. Article 123 also had to be amended

to adapt bank working conditions –permission to form unions— to a private

regime. A new banking act also had to be passed and, as the next chapter

discusses, new legislation on financial groups had to be implemented.

The sale of banks was one of the largest privatization processes to take

place in Mexico because of the transaction amount and the corrective effects it

had on economic agents’ confidence regarding the conduct of economic policy,

the development of the economy, and the allocation of productive resources.

Mexican banks were privatized in four stages. During the first stage, a

collegiate body called the Bank Privatization Committee was created to

undertake the privatization process. During the second stage, requests to

participate in the process were received and bidders were selected based on

several criteria. The third stage involved estimating the banks’ value. The fourth

stage covered the auctions in which banks were adjudicated to the best bids.

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Although the first criterion was priority, there were three guidelines for

privatizing the banks: obtain the largest amount possible from the sale of

banks, contribute to improving the operation of the country’s financial

system, and keep bank share ownership in the hands of Mexican

investors.

Authorizations issued by the Privatization Committee for participating in

the corresponding auctions were non-transferable. Participating groups had to

lodge a financial deposit and sign a confidentiality agreement. Following the

corresponding auction, each buyer was given the opportunity to undertake an

exhaustive audit of the bank it had acquired in order to apply any adjustments

to the sale price.

As mentioned, the privatization of the 18 banks took place between June

1991 and July 1992. One of the reasons for such a rapid sale was not to give

recently privatized banks competitive advantages. The first bank to be privatized

was Multibanco Mercantil in June 1991. The last was Bancen in July 1992. The

other multiple banks that were privatized were: Banpais (June 1991), Banorte

(August 1991), Bancreser (August 1991), Banamex (August 1991), Bancomer

(October 1991), BCH (November 1991), Serfin (January 1992), Comermex

(February 1992), Banco Mexicano Somex (March 1992), Banca Promex (April

1992), Banoro (April 1992), Banorte (June 1992), and Banco Internacional

(June 1992).

Once the bank privatization program was completed in the middle of

1992, the Ministry of Finance opened up the opportunity for new multiple banks

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to be created in Mexico. The response was immediate and within a relatively

short period of time, 19 new private multiple banks began operating including

Interestatal, Del Sureste, Industrial de Jalisco, Capital Interacciones, Inbursa,

Quadrum, Pronorte, and Regional del Norte.

9. Evolving recovery

Mexico’s evolution towards universal banking has been a long and uneven

journey. At least two obstacles have hindered a smooth path. During a key

period of history, banking legislation was so inadequate that in order to grow

banks and credit institutions had to find ways around it. Such was the case in

Mexico in the beginning of the 1970s with legislation on credit institutions dating

from the 1920s. The second major obstacle was the 1982 expropriation of

banks. The process of rebuilding financial groups got underway following the

reprivatization of banks which was completed in 1982.

Following the reprivatization, the financial authorities retained their

regulatory and oversight powers with respect to banks but the reprivatized

banks and those that were subsequently created regained their operating

freedom and the management of their shareholder base without interference

from the authorities. Consequently, either through reprivatized banks or newly

created banks, the reconstruction of financial groups took place fairly quickly.

Mexican contemporary universal banking is based on three laws: the Law

on Credit Institutions, the General Act on Credit Organizations and Related

Activities and the Law to Regulate Financial Institutions. The latter

incorporated a far-reaching reform by introducing in Mexico the concept

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of a holding company at the head of each of the financial groups that

were formed. Within Mexico’s new financial group framework, holding

companies consequently replaced multiple banks at the head of the groups.

Thus, based on the aforementioned regulatory framework, the Ministry of

Finance sequentially issued authorizations to form new financial groups. Not all

of them prevail to date. For example, the authorities revoked previously issued

authorizations in order to create financial groups Arka, CBI, and Márgen.

Another feature to note is that several of the authorized financial groups

currently operating do not have a commercial bank.

Three main features distinguish the financial system that was created in

Mexico since 1992. The first is the presence of several commercial banks which

operate independently of a financial group. In fact, this is the case of 15 out of

40 commercial banks that currently exist in Mexico. The second feature is that

regulations allow for the creation of financial groups without them having to

possess a commercial bank. In Mexico, there are currently 17 cases of this

type out of a total of 36 financial groups. Finally, as in the past, the largest and

most powerful financial groups do have a commercial bank. In fact, in terms of

the number of affiliates, the strongest financial group is no longer Banamex or

Bancomer but Banorte.

As mentioned, the list of operating commercial banks includes the

following 14 institutions which are part of a financial group: Banamex, BBVA,

Bancomer, Santander, HSBC-México, GECapital, Ixe, Inbursa, Interacciones,

Mifel, Scotiabank, Invex, Afirme, Mercantil del Norte, Banco del Centro, Bank of

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America, J.P. Morgan, ING, Credit Suisse, and Barclays. Commercial banks

not belonging to a financial group are: Regional de Monterrey, Bansi, Banco del

Bajío, ABN Amro, American Express, Bank of Tokio-Mitsubishi, Comerica Bank,

Ve por Mas, Deusche Bank México, Azteca, Autofin México, Compartimos, and

Ahorro Famsa. Finally, the list of financial groups is: Afirme, Barregio,

GECapital, Bank of America, Banorte, Barclays, Bancomer, Credit Suisse, HSBC,

Inbursa, Interacciones, Mifel, Santander, Scotiabank-Inverlat, Ve por Mas,

ING, Invex, Ixe, and J.P. (Chase) Morgan.

10. Banking crisis and resolution

Reprivatized banks had not been operating that long before the Mexican

banking system was plunged into its worst-ever crisis.

Prior to this, evidence had shown that privatization generated very strong

competition across banking sector segments. As might be expected, this strong

competition triggered a decrease in banking concentration indexes in at least

three areas: deposits, loan portfolio, and securities portfolio. Furthermore,

during those early years of bank reprivatization there was no major change in

the average number of branch employees, which decreased from 36 in 1990 to

34 in 1994.

Experts remained divided as to the origin of the severe banking sector

crisis of early 1995. The near collapse was partially the result of poor moral

solvency of some of the owners of privatized banks. It should be recalled that

three of the problem banks —Unión, Cremi, and Oriente— had to undergo

24

intervention by the authorities even before the December 1994 devaluation.

The main impact on banks undoubtedly came from the balance of payments

crisis which gave rise to the devaluation. During that period, banks’ portfolio

greatly weakened owing to the rise in interest rates and the fact that many

borrowers were unable to continuing paying their loans.

The crisis had a major impact on all of the system’s banks, albeit to

different degrees. This meant the authorities had to take diverse actions to

tackle the banking crisis. Those actions were initially aimed at resolving liquidity

problems in order to subsequently focus on solvency problems. Concerning

liquidity, the main mechanism was Banco de México’s dollar-denominated loan

window which aimed at preventing banks from defaulting on foreign currency-

denominated debt.

As to solving solvency problems, the authorities implemented four types

of programs: temporary capitalization of banks, intervention in banks that were

in a more fragile situation to procure their recovery, a second capitalization

program, and portfolio purchase and bank debt support programs. The first

program involving temporary capitalization was aimed at preventing the capital

of some banks with respect to their liabilities from decreasing below the legal

limit. In order to close the capital shortfall gap, several banks were granted

loans amounting to more than 7 thousand million pesos, all which was gradually

paid back. The portfolio purchase capitalization program was put in place in

1995 and 1996, and agreements corresponding to the purchase were

completed in 1997. In exchange for the purchase of past due loans, the

authorities required the shareholders of intervened banks to make additional

25

capital contributions.

Bank borrower support programs were implemented to help small

debtors. The first program was introduced in April 1995 to provide relief for micro,

small and medium-sized bank debts. Similar programs were implemented for

entry-level mortgage debtors. This temporary policy was subsequently extended

to medium-sized companies and agriculture and cattle breeding sector debtors.

Finally, as mentioned, intervention in banks with the biggest problems

began in 1994. After the 1994 devaluation, four other banks were put under

management intervention: Banpaís, Banco Obrero, Bancen, and Interestatal.

In 1996 four more recently created banks were subject to intervention: Sureste,

Capital, Pronorte, and Anáhuac. Finally, from 1997 to 2001, the National

Banking and Securities Commission (Comisión Nacional Bancaria y de Valores,

CNBV) agreed to intervene in one bank per year: Confía, Industrial, Bancrecer,

and Quórum. As a result of these interventions, banks were returned to a sound

footing and subsequently merged.

11. Global banking

At the beginning of 1991, on the eve of the reprivatization of banks and

when the North American Free Trade Agreement began to be negotiated, the

possibility of allowing foreign banks to participate in the Mexican market

raised favorable expectations in foreign financial circles.

When NAFTA was enacted at the end of 1993, the only foreign bank

26

operating in Mexico was Citibank. Citibank’s assets amounted to only 0.5% of

banks’ total assets. NAFTA market share limits were generally congruent with

that reality and with the Mexican authorities’ idea of deliberately limiting foreign

banks’ operations in the country. The initially contemplated period of transition

would begin in January 1994 and end in December 1999. During that time the

share of the market that each foreign bank could individually obtain would be

below or equal to 1.5 percent. As to the global share of foreign banks, in the

beginning it had to be below 8 percent and would gradually increase to a 15

percent ceiling at the end of the transition stage.

The plan within the framework of NAFTA was also that at the end of the

transition period, raising the ceilings on the announced restrictions would be

considered. However, in the event of the joint market share of foreign banks

surpassing 25 percent of the total system, the Mexican government would be

entitled to freeze growth in banks’ foreign capital only once and for a period of

less than three years during the four years following the end of the transition

process. NAFTA also placed a 30% limit on the equity interest of foreign banks in

Mexican banks.

Although this may seem restrictive, foreign banks soon began to enter the

Mexican market. In 1994, four international banks began operating in Mexico. In

April of that year, GE Capital opened its doors followed in November by

Santander, J.P. Morgan, and Chase Manhattan. Such was the trend when the

banking crisis erupted at the beginning of 1995, placing the system on a totally

different footing.

27

With respect to the entrance of foreign banks in February 1995, limits on

their market share that had been agreed on under NAFTA were raised. First, the

maximum market share of a foreign bank affiliate was increased from 1.5

percent to 6 percent. The limit was generally raised from 8 to 25 percent.

Furthermore, the limit on a foreign bank’s equity stake in a local bank was raised

from 30 to 49 percent. Once this new rule came into effect, a strong injection of

foreign capital poured into three big banks: Bancomer, Serfin, and Bancrecer.

Likewise, in May 1995, Banco Bilbao y Vizcaya (BBV) signed a letter of intent

to buy Banco Mercantil Probursa.

In a second stage, several foreign bank affiliates began operating in

Mexico and acquisitions of large equity stakes in local banks began to increase.

Thus, while the share of foreign capital in the total banking sector was only 5

percent in 1994, by 1996 it had risen to 52.4 percent. Of that amount, 42.7

percent corresponded to the acquisition of equity stakes in local banks and only

9.7% to foreign banks’ equity stakes in affiliates.

The third stage in Mexican market’s opening to foreign banks took place

at the end of 1998. The starting point was the trade opening schedule that

had been negotiated in NAFTA. As a result, restrictions on equity stakes that

would have been in place until 1999 were lifted a year earlier. It was during that

period that the fully fledged entry of foreign banks to Mexico finally materialized.

The unrestricted entry of foreign banks in Mexico first got underway in

August 2000 when BBV bought Bancomer. The following year, Citibank

acquired Banamex, and in November 2002, HSBC bought Bital. Serfin had

28

already been bought by Banco Santander and the same was the case for

Inverlat, which was bought by Bank of Nova Scotia. As a result of these large

transactions, the percentage of foreign capital invested in local banks

continually rose. Thus, by the end of 2003 it already amounted to 82.3

percent and was distributed according to its origin as follows: Spain, 37.6

percent (BBV- Bancomer and Santander-Serfin); the United States, 27.6 percent

(Banamex-Citibank, Bank of America, and others); Mexico, 17.7 percent

(Banorte, Inbursa, and others); the United Kingdom, 10.1 percent (HSBC –

Bital); Canada, 10.1 percent (Scotiabank–Inverlat); and others, (ING,

Deutsche, Tokio, Dresdner, and Abnamro, among others).

12. What does the future hold?

Until October 2007, the overall outlook for Mexican banks was as follows.

The commercial banking subsector is made up of 40 banks including the more

traditional banks (Banamex, Bancomer, for example) and new banks (verbi-

gracia, BanCoppel, and Banco Wal-Mart). Most of them are part of the existing

47 financial groups that exist to date. These groups, formed around their

respective holdings, have other affiliates besides multiple banks.

Mexico has a dynamic banking sector that is growing. The most visible

recent trend has been towards the entry of a larger number of market

participants. Authorization of new commercial banks has derived mostly from a

deliberate policy on the part of the authorities to allow for the creation of new

banks in order to encourage greater competition within the sector. Not only does

it seek to reduce the cost of banking services but also to tighten margins.

29

Strictly speaking, it is impossible to envisage the future. It is possible,

however, to outline a picture of the likely future of banks based on the trends

that have characterized it to date and the contemporary financial sector. A

relative intensification or weakening of trends is difficult to foresee. As we have

said, one such short-term trend has been the emergence of new banks. But over

a longer time horizon the principle behind many of these trends derives from the

influence of technological change on the development of banks in particular and

the financial sector in general.

The trend in the Mexican banking sector in recent decades has been

marked by very intense technological change. And such a trend could continue.

Technological change has enabled banks to offer on-line products and services.

In particular, it is reasonable to expect the ongoing emergence of new

banking products. A former example is the development of so-called

derivatives, which lower risks associated with financial transactions from

unexpected modifications in at least three variables: exchange rates, interest

rates, and credit risks.

Another recent trend that is very likely to continue is the so-called

securitization of bank products. In other words, all standardized bank products

to which a price can be assigned can potentially be sold in financial markets.

While there are many, one example is the securitization of mortgage loans.

Under this concept, loans of this kind can be sold to institutional or individual

investors and therefore removed from banks’ portfolios (off-balance sheet

loans).

30

Another foreseeable trend is the ongoing reconfiguration of areas of

specialization between banks per se (financial intermediation) and other

financial intermediaries. One of many examples is the way in which banks,

pension funds and insurance companies compete with each other for increasingly

sophisticated investor segments with broad access to savings. This trend has

been partly strengthened by the emergence of new financial intermediaries. We

can cite, for example, hedge funds and venture capital companies (which offer

savers investments in specific projects through stock ownership).

The last and very marked trend is towards the globalization of banking

operations and financial systems. As for banks, the term globalization can refer

to bank operations or their property. Regarding the former, we can cite cross-

border transactions through which banks capture funds in one country and lend

them in another or in several. This cross-border feature can also refer to

providing banking services such as those related to fund transfers.

Regarding capitalization, there are two variants. In the former, the shares of

local banks can be bought by foreign investors or banks. In the second, foreign

banks increase their share of new markets either by opening branches or by

creating affiliates.

31

BIBLIOGRAPHY

Chapter 1

─ McCalab, Walter F. Present and Past Banking in Mexico, New York,

Harper & Brothers, 1920.

─ Rosenzweig, Fernando, “Moneda y bancos”, in Daniel Cosío

Villegas (et.al), Historia Moderna de México, El porfiriato, La Vida

Económico, vol. VII, book II, chapter VII, Mexico, Ed. Hermes, 1965.

Chapter 2

─ Manero, Antonio, La Reforma Bancaria en la Revolución

Constitucionalista, Mexico, (draft), 1958.

─ Manero, Antonio, El Banco de México: Orígenes y Fundación, New

York, F. Mayans, 1926.

Chapter 3

─ Moore, O. Ernest, Evolución de las Instituciones Financieras en

México, Mexico, Centro de Estudios Monetarios Latinoamericanos,

1963.

─ Turrent Díaz, Eduardo, Historia del Banco de México, vol. 1, Mexico

(draft), 1982.

32

Chapter 4

─ Campos Andapia, Antonio, Las sociedades financieras privadas en

México, Mexico, CEMLA, 1963.

─ Hernández, Octavio A., Derecho Bancario Mexicano, Mexico,

Ediciones de la Asociación Mexicana de Investigaciones

Administrativas, 1956.

─ Manero, Antonio, La Revolución Bancaria, Mexico, (draft), 1957.

Chapter 5

─ Acosta Romero, Miguel, Derecho Bancario, Mexico, Porrúa, 1979.

─ Secretaría de Hacienda y Crédito Público, Legislación Bancaria,

vol. II, Mexico, (draft), 1980.

Chapter 6

─ Acosta Romero, Miguel, La Banca Múltiple, Mexico, Porrúa, 1981.

─ Comisión Nacional Bancaria y de Seguros y Secretaría de Hacienda

y Crédito Público, Banca Múltiple. Primer ciclo de conferencias de

alto nivel, Mexico, February 1978, (draft).

33

Chapter 7

─ Pérez López, Enrique, Expropiación Bancaria en México y Desarrollo

Desestabilizador, Mexico, Diana, 1987.

─ Tello, Carlos, La Nacionalización de la Banca en México, Mexico,

Siglo XXI, 1984.

Chapter 8

─ Sales, Carlos, Indemnización Bancaria y Evolución del Sistema

Financiero, 1983-1988, Mexico, Páginas del Siglo XX, 1992.

─ Suárez Dávila, Francisco, “La administración de la Banca

nacionalizada” en Gustavo del Ángel (et.al), Cuando el Estado se

Hizo Banquero, Lecturas del Trimestre Económico 96, Mexico,

Fondo de Cultura Económica, 2005.

Chapter 9

─ Aspe Armella, Pedro, El Camino Mexicano de la Transformación

Económica, Mexico, Fondo de Cultura Económica, 1993.

─ Ortiz Martínez, Guillermo, La Reforma Financiera y la

Desincorporación Bancaria, Mexico, Fondo de Cultura Económica,

1994.

34

Chapters 10 and 11

─ Graf, Pablo, “Policy responses to the banking crisis in Mexico”, BIS

Policy Papers, no. 6, pp. 164-182.

─ Murillo, José Antonio, “La banca después de la privatización. Auge,

crisis y reordenamiento”, en Gustavo del Ángel (et.al), Cuando el

Estado se Hizo Banquero, Lecturas de El Trimestre Económico 96,

Mexico, Fondo de Cultura Económica, 2005.

Chapter 12

─ Borio, Claudio E. V., “Change and constancy in the financial system:

implications for financial distress and policy”, BIS Working Papers

no. 237, October 2007.